Investors seek to halt bank's delist

SMITHFIELD - An investor challenge to KS Bancorp's plan to go private by delisting its 1.2 million shares of stock is an attempt to spark takeover bids for the $223 million bank, industry followers say.

Two prominent North Carolina businessmen who together own 80,000 shares, or 6 percent, of KS stock, Maurice Koury and Felix Harvey, are challenging the price the bank proposes to pay to buy back shares.

The pair argue in a filing with the U.S. Securities and Exchange Commission that management's plan undervalues the bank and that "by joining forces with another financial institution, the company would dramatically improve its financial performance, increase the liquidity of its shares and create significantly more value for the shareholders."

Bank officials, who won't comment on any acquisition interest in the institution, say they decided to take the small bank private to avoid higher auditing and compliance costs associated with reforms dictated by Sarbanes-Oxley accounting standards.

"Other banks have been interested in doing the same thing," says KS President and Chief Executive Officer Harold Keen. "That's what we've heard. They would do this too if they didn't have so many shareholders."

Keen estimates freedom from Sarbanes-Oxley and SEC filings would save the bank $250,000 a year.

Publicly traded as a bulletin board stock since 1993, KS in late December filed documents with the SEC stating that its plan would reduce its number of shareholders to fewer than 300 - the minimum needed for a company to remain listed. Keen puts the current number of shareholders at around 390.

The per-share price for the thinly traded stock, which sells under the symbol KSAV.OB, has ranged from a low of $19.50 to a high of $25 during the past 52 weeks.

Under the KS reorganization plan, investors holding fewer than 200 shares would be paid $24 per share.

Those with more than 200 shares would receive one new share of KS common stock for every 200 shares they own, or $24 a share for any fractional units of fewer than 200. Stockholders still holding shares following that reverse split would receive 250 shares for each share they still hold.

Koury, president and owner of Burlington-based Carolina Hosiery Mills and a longtime benefactor of the University of North Carolina at Chapel Hill, and Harvey, a Kinston businessman, argue that "other area financial institutions would pay 20 percent to 40 percent more" for the stock. Koury and Harvey control the shares through family foundations.

Raleigh banking lawyer Tony Gaeta says the Koury-Harvey filing is an attempt to alert the market to the KS management plan and to spur expansion-minded banks into making tender offers to buy the bank - offers that wouldn't require the approval of the KS board of directors.

"The only question is who will be the one to throw the first stone at Harold Keen," Gaeta says. "Banking is a genteel profession and strictly country club, and people don't like to be the first to throw a stone."

Tony Plath, a finance professor at the University of North Carolina at Charlotte, agrees. "That's exactly what they are trying to do," he says.

Gaeta and Plath also agree that Koury and Harvey are motivated by more than share price.

"Felix and Maurice are no strangers to stock dealing. They are sophisticated investors," Gaeta says. "And in this case, I think they are scared at the prospect of being left holding stock in a private company that will no longer be subject to financial disclosure."

Keen says shareholders will vote by proxy on the plan and that the results of the vote will be announced at a special March 14 shareholders meeting.

The number of shareholders who will be cashed out because of the plan, he says, represent about 2 percent of the bank's 1.2 million shares. "Less than 2 percent will be forced out," Keen says. "And if you have a plan that will mean major savings for the other 98 percent, well, it's just logical to do that."

KS, with $170 million in total loans and $150 million in total deposits, operates in seven offices in Kenly, Goldsboro, Wilson, Garner, Clayton, Selma and Smithfield. For the fiscal year ended Dec. 31, 2004, net income decreased by 8 percent to $1.3 million.

Attempts to reach Koury for comment were not successful. Harvey's Kinston office issued a statement stating that other shareholders had been contacted.

The statement added, "We'd hope the (KS Bancorp) board would be willing to consider what we said in our (SEC) filing and talk with other interested financial institutions."